Here is a lowdown on the key aspects of the Model Tenancy Act, how it applies to you and how it interacts with the existing regulations.
The Union Cabinet on Wednesday approved the Model Tenancy Act, aiming to bring about wide-ranging reforms to “unlock over one crore vacant houses” and bridge the trust deficit between landlords and tenants. Some of the reforms include setting up separate rent authorities, courts and tribunals in every district to ensure speedy dispute resolution and establishing a fair mechanism to revise rents to protect tenants against arbitrary hikes while also keeping in view the owners’ economic interests.
The law seeks to balance out the renter’s interests with tenants, who have enjoyed protection against eviction and rent hikes under laws that were drafted decades ago and mostly with the intent of preventing exploitation of tenants by landlords.
However, these provisions though well-intentioned, stand out in stark contrast to the archaic Rent Control Act 1948 the various versions of which continue to govern the tenancy in India’s states.
It is still a matter of choice for states and Union Territories to repeal or amend their existing Acts, and as one expert puts it, amounts to a great deal of work on their part. Furthermore, the law is also applicable prospectively and will not affect existing tenancies, meaning that owners who have not been able to evict tenants due to the provisions of the previous laws will get no relief unless the state in which they own a property specifically provisions for it.
Here is a low-down on the key aspects of the new law, how it applies to you and how it interacts with the existing regulations.
What is the Model Tenancy Act 2020?
The Model Tenancy Act is the government’s efforts to enable the institutionalisation of rental housing by gradually shifting it towards the formal market. In a statement, the government said that it is expected to give a fillip to private participation in rental housing as a business model for addressing the huge housing shortage.
To minimise petty disputes, the Act mandates for written agreement for all new tenancies, which will have to be submitted to the concerned district ‘Rent Authority’. This means that rent and duration of tenancy will be fixed by mutual consent between owner and tenant through a written agreement.
It also provides three months’ notice to tenants for a hike in rentals to ensure landowners are enabled to extract the market price for their properties while also ensuring that tenants get enough notice to make adequate arrangements in their best interests.
The Act also puts a cap on security deposits for residential properties making sure that tenants are not forced to invest hefty sums at the start of the tenancy as is the norm in several large cities such as Mumbai and Bengaluru. As per the Act, only two months of rent can be taken as advance for residential property, whereas the current norm in metro cities ranges from five to up to 12 months.
According to the Act, if the tenant fails to vacate the premises let out on rent in accordance with the tenancy agreement, he or she will be liable to pay the landlord twice the monthly rent for the first two months and then four times till the latter continues to occupy the said premises.
“If the landlord fails to make any refund, he shall be liable to pay simple interest to the tenant at such rate as may be prescribed from time to time on the amount which he has omitted or failed to refund,” the law stated.
If a dispute emerges between the owner and tenant, they will have to first approach ‘Rent Authority’. If any party is not satisfied with the Rent Authority’s order, ‘Rent Court’ can be approached, followed by a final and then ‘Rent Tribunal’.
The Act says that no landlord or property manager can withhold any essential supply to the premises occupied by the tenant in the event of a dispute or on any other pretext. They have to provide a 24-hour notice to tenants before undertaking any repair work that may disrupt utilities’ supply.
According to the ministry, tenants will not be evicted during the continuance of the tenancy agreement unless otherwise agreed to in writing by both parties.
Under the Model Tenancy Act, unless otherwise agreed in the tenancy agreement, the landlord will be responsible for activities like structural repairs except those necessitated by damage caused by the tenant, whitewashing of walls and painting of doors and windows, changing and plumbing pipes when necessary and internal and external electrical wiring and related maintenance when necessary.
On his part, the tenant will be responsible for drain cleaning, switches and socket repairs, kitchen fixtures repairs, replacement of glass panels in windows, doors and maintenance of gardens and open spaces, among others.
“Where the landlord proposes to make any improvement in or construct any additional structure on any premises, which has been let out to a tenant and the tenant refuses to allow the landlord to make such improvement or construct such additional structure, the landlord may make an application in this behalf to the Rent Court,” the Act stated.
The tenant will not carry out any structural change or erect any permanent structure in the premises let out on rent without the written consent of the landlord, it also stated.
What was the need for the law?
As per the 2011 census, only 21 million (20 percent) of urban houses were given out on rent. Conservative estimates state that as many as 1 crore houses are standing vacant for various reasons. But a key dampener for investor/ owner sentiment was that there was no sound mechanism to resolve tenant-landlord conflicts apart from a really expensive and protracted route of filing a civil lawsuit. Property owners also found it nearly impossible to evict tenants which further created a negative view towards renting.
Furthermore, the returns from residential real estate have remained very low. The prices of owning a house have gone beyond the cusp in most large cities in India but the corresponding rental income is still in the range of 1.5 to 3 percent of the capital values, according to a report in Moneycontrol. As a result, it fails to attract capital, or, long-term operations interest from property owners when compared with the ordeal they may have to endure in case of a bad tenancy.
Mumbai, which is the nerve centre of economic growth in India, is an apt example of this. According to a report in Livemint, in 1961, self-occupied and tenanted housing in the city were in about equal proportion. However, between 1961 and 2010, about 95 percent of residential construction was for ownership and only 5 percent was meant for rental occupation. Tenants continue to occupy dilapidated buildings in central locations because the baseline was capped in 1999 when Maharashtra’s Rent Control Act was amended and owners refuse to make structural repairs citing profitability and market rates.
The Act tries to address how a renter can legitimately increase the rent without compromising the rights of a tenant. Furthermore, the law not only minimises the possibility of disputes by clearly defining landlords’ and tenants’ responsibilities and obligations but also puts in place a robust mechanism for grievance redressal mechanism to provide speedy resolution to disputes.
Rent Control Act and the MTA
Tenancy and leasing operations in India are closely regulated by a Rent Control Act that is implemented in various forms in all states. For example, Maharashtra has the ‘Rent Control Act 1999’, Delhi has the ‘Rent Control Act 1958’ and Chennai has the ‘Tamil Nadu Buildings (Lease and Rent Control) Act 1960. The broad idea covered in each of the Rent Control Act is to protect tenants from unfair eviction and to settle disputes between the landlord and the tenant.
However, a serious drawback of these laws was that most of them have been not amended in over two decades, ensuring that the rent ceiling remains capped at the levels prevalent in the late 90s. This has certainly discouraged owners from renting out property and has also dampened investor appetite for purchasing second or third homes due to low capital returns. On the other hand, as this article in Livemint argues, it has not even benefitted the low and middle-income groups as was originally intended.
“The wealthy have greater capability to tap into the networks that give access to rent-controlled housing. For instance, multiple studies have found that the median income of families living in rent-controlled housing in New York is higher than that of those living in unregulated housing… Home-ownership is for a small minority, given elevated prices and the difficulty of accessing credit. Another minority may be able to afford the high rentals in the slender slice of the market that comprises unrestricted rental housing. For the rest, there are the slums—or rental housing in far-flung areas,” the article reads.
As industry experts have opined, the act, if implemented in letter and spirit will encourage the private sector to develop housing projects for rent purposes and also bring a huge stock of vacant flats in the rental market.
However, as land is a state subject the MTA is not mandatory for the states to implement; states and union territories can adopt the Model Tenancy Act (MTA) by enacting fresh legislation or they can amend their existing rental laws suitably. As the rules are not binding, states would hardly be in a hurry to embrace it given the fact that political expediency may be a factor in consideration. Furthermore, the law envisages a three-tier grievance redressal system with a district-level judge in charge of dispute resolution. This means that states will have to invest time, resources and efforts to set up these institutions and also spare human resource from an already burdened lower judiciary system.
With inputs from agencies